Ignore the sceptics – it’s time to buy Japan

Japan has been in the doldrums for years. Stocks have had countless false dawns, and are a constant disappointment. Everyone hates it. But that’s precisely why you should buy it, says John Stepek.

John Stepek
By
published

We've been bullish on Japan at MoneyWeek for quite some time.

So I'll accept that I'm hardly a neutral observer when it comes to the fortunes of the Japanese stock market. But I think this latest bull run has long legs.

In fact, I think there's a good chance that the Nikkei 225, currently at around 11,400, could be challenging the 13,000 level by the end of March.

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How can I be so specific?

Well, because Japan's economy minister himself told me...

Everything is looking up for Japan

At the weekend, Japan's economy minister, Akira Amari, made an announcement that would have grabbed frenzied headlines had it happened in any other developed economy.

According to MarketWatch, he said: "It will be important to show our mettle to see the Nikkei reaches 13,000 points by the end of the fiscal year." That's 31 March. In other words, he's aiming for a gain of around 15% in six weeks or so.

Can you imagine what would happen if US Federal Reserve head Ben Bernanke said that he'd been told to get the Dow Jones index up to 16,000 before the end of the first quarter? I suspect investors would take him at his word. They've been well trained by now. The Dow would get there by the end of next week.

But Japan has been in the doldrums for so long, that to many investors, it seems like wishful thinking at best. Yet another false dawn for a market and an economy that's been guaranteed to disappoint for longer than many can remember.

And that's probably the main reason why I like Japan so much right now.

All the fundamentals are lining up for Japan right now. The government has decided that it needs to have a weaker currency and higher inflation. And despite concerns that Japan would get a ticking off at the G20 meeting this week, it looks like the country will get a free pass.

The Americans have already effectively given Japan the green light. US Treasury official, Lael Brainard, said yesterday: "We support the effort to reinvigorate growth and to end deflation in Japan." Her comments gave the yen another shove off the cliff. A dollar now buys more than 94 yen, from less than 80 a few short months ago.

As my colleague Merryn Somerset Webb noted recently, the US has every reason to want a strong Japan. It needs an ally to offset China's growing power, and Japan is the most sensible option. So don't expect too much mouthing off about currency wars' from that direction.

Same goes for Europe. The French might be squealing about the strength of the euro. But the Germans struck back yesterday, with Jens Widmann arguing that the euro is "not seriously overvalued".

So the Japanese have a clear run at weakening the yen. And that's good news for company earnings. According to Kazuhiro Miyake at Daiwa Securities, if the yen/dollar exchange rate averages 95 over 2013, then earnings per share for Japanese companies will hit near-record levels.

On top of this, Japan is cheap, which means even the prospect of Nikkei 13,000 is hardly market insanity.

The best thing about Japan everyone still hates it

But the best thing about Japan is the sheer level of scepticism that remains in the market. Investors have got so used to ignoring Japan that despite its huge gains so far, that there's still room for far more.

According to the most recent Merrill Lynch Bank of America fund manager survey, a net 3% of global fund managers are overweight' Japan. That's a lot better than the massive underweight' seen the previous month, but it's hardly a ringing endorsement.

This is a very healthy sign for Japan bulls. Very few markets do what you expect them to, when you expect them to do it. That's why it pays to be a contrarian. Perhaps nowhere is this demonstrated more brutally than within the foreign exchange markets.

Just look at the performance of the euro last year. Everyone expected it to be demolished. It wasn't. That single fact probably destroyed more hedge funds than any other market event last year (call it the petty revenge of the eurocrats).

So high levels of scepticism are good. It means there are plenty more bears left to turn bullish, which means there's a lot of life left in a trend.

The Japanese government is serious. And investors will gradually wake up to that, as they see prime minister Shinzo Abe hammering home the inflation message, and corporate earnings in Japan picking up. In turn, the market will continue to rise, and more and more investors will panic about missing out.

You know that old saying in the market Don't fight the Fed'? Well, finally it applies to Japan too. There'll be no more half-hearted attempts at inflation now. Expect the Japanese to go the full Bernanke' before this is all over.

Japan is cheap. Its government is determined to inflate the market and the economy. And despite the gains so far, investors are still worried about jumping on board.

Taken altogether, that's a fantastic mix. In short, if you don't already have exposure to Japan, I suggest you get some now. In our recent cover story on currency wars, we looked at some ways to buy in if you're not already a subscriber, you can subscribe to MoneyWeek magazine.

This article is taken from the free investment email Money Morning. Sign up to Money Morning here .

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John Stepek
John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.

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